Author: Special contributor Cara Shotmeyer
During summers at the Jersey Shore, I appreciate hours spent in the ocean. Although I would not say I’m an avid surfer, I love being out on the board. I enjoy the challenge of paddling through strong currents, catching a wave that will carry my board beyond the break to the shore. Getting pounded by waves and thrown into the white-water time and again is part of the sport. Nothing beats the thrill of catching a great wave and riding it in, making it that much sweeter after the challenge of the previously failed waves. Each summer rekindles the passion for surfing within me that keeps me going despite unsuccessful attempts. The risk in trying provides exhilaratingly unpredictable moments that are always of greater worth than sitting on the shore.
I can find similarities between surfing and the stock market. Having an investment portfolio requires discipline and time spent in it for a successful outcome. As many market pundits will tell you time and time again, what matters is time IN the market, not timing the market. Investing in the stock market also requires careful considerations of the balance between risk and reward, but for those that start early, will more often than not, be rewarded with attractive returns and a growing nest egg.
For a college student in their twenties, it can be easy to dismiss the idea of investing until there is money to allocate. Although it is true that one cannot invest what one does not have, I would argue that young people have more than they think they do. The younger you are, the more time you have to invest money into the market. Although navigating the stock market can be challenging or overwhelming, the most important part of the challenge is to get started. To continue the surfing analogy, think of the ocean and waves as the market. Some quarters may yield extremely high volatility just as the ocean can be stirred by severe storms. Other quarters bring less volatility, just as the ocean at times can be as flat as glass. There is also the possibility of high market performance, as the ocean can produce perfect swells to surf. The market can also suffer a downturn, as the ocean can produce terrible surfing conditions. Said differently, the market ebbs and flows.
Let’s now look at the impact time can have in a young person’s life, relating to finances. Time and compound interest are two valuable factors working positively for a young person. Compound interest said simply, is interest on interest. It means that a higher amount will be working for you each year. For example, at age twenty, if you start to save $1,000 yearly at a 5% interest rate, at age seventy, you will have $220,815. Keeping all else the same, if you started saving at age thirty, you would instead have $127,849 and if instead age forty was your starting date, you would have $70,760. Time has the power to greatly increase wealth and choosing to start now – even with a little – is better than waiting. Let’s use another example to help illustrate the importance of starting to save early on in life. Imagine you decide to save $1,000 for the next fifty or so years. You want to have physical cash in the safety of your home and put $1,000 into your porcelain piggy bank that sits on your nightstand. Consistently you deposit the money and before long, fifty years have passed. You celebrate the accomplishment and smash the piggy bank so you can spend all your hard-earned money. When you take the $50,000 to the store, you learn that because of inflation, your money is worth much less. The new television you were looking to buy fifty years ago is more than triple the price. Inflation takes a nasty toll on cash and erodes its value over time, producing a devalued dollar if left alone. This is why compound interest is so valuable. It can help grow your portfolio over time and to a certain degree protect against the erosion of inflation to increase the value of one’s money over time.
Now that the importance of compound interest is understood, time can be used to navigate the vast ocean of the finance world, and thus exposing the desire for instant gratification. Young people have been led to believe that whatever they desire can be obtained instantly through the internet. Information, loans, social media, food ordering apps, shopping, entertainment – all are accessible with the touch of a button in seconds. This has bred a society characterized by impatience and a lack of discipline. This has translated to young people choosing momentary thrills in exchange for the possibility of exponential financial success down the road. According to people aged 18-29 in the United States, when asked about their investing habits, 75% were not investing in the stock market. What is not surprising about this statistic, is the nature of young people to be consumed by concerns of college debt, car payments, rent, and groceries. The immediate concerns of daily living and starting new jobs leads young people to feel as though they are drowning. Investing in the stock market and saving is not at the top of their priority list. As stated previously, the greatest benefit young people have is time. It is important to plan for the long-term because it comes up fast.
It is important to accept the challenge to get out in the ocean of the market and use the greatest resource you have to your advantage. Whether the ocean seems to have perfect swells or terrible thunderstorms, disciplining yourself to get out and surf the waves will give you a leg up in the long run of life. Happy saving and investing!